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Builders Firstsource Inc (BLDR) Q4 2018 Earnings Conference Call Transcript

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Builders Firstsource Inc  (NASDAQ: BLDR)
Q4 2018 Earnings Conference Call
March 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Builders FirstSource Fourth Quarter and Full Year 2018 Earnings Conference. Today's call is being recorded and will be archived at www.bldr.com.

And now, it's now my pleasure to introduce Mr. Binit Sanghvi, Vice President, Investor Relations. Please go ahead.

Binit Sanghv -- Vice President, Investor Relations

Thank you, Laurie. Good morning and welcome to the Builders FirstSource Fourth Quarter and Full Year 2018 Earnings Conference Call.

With me today are Chad Crow, Chief Executive Officer and Peter Jackson, Chief Financial Officer.

A copy of our slide presentation referenced on this call is available on the Investor Relations section of the Builders FirstSource website at www.bldr.com.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Any reproduction of this call, in whole or in part, is not permitted without prior written consent of Builders FirstSource. As a reminder, this conference call is being recorded today, March 1st, 2019.

Builders FirstSource issued a press release after the market closed yesterday. If you do not have a copy, you can find it on our website.

Before we begin, I would like to remind you that during the course of this conference call, we may make statements concerning the Company's future prospects, financial results, business strategies and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Please refer to our most recent Form 10-K filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risks. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

The Company will discuss adjusted results on this call. We have provided reconciliations of non-GAAP financial measures to their GAAP equivalents in our earnings press release and detailed explanations of non-GAAP financial measures in our Form 8-K filed yesterday, both of which are available on our website.

At this time, it's my pleasure to turn the call over to Mr. Chad Crow.

Chad Crow -- Director and Chief Executive Officer

Thank you, Binit and good morning, everyone. I appreciate everyone taking the time to join our call today.

I would like to share with you an update on our 2018 financial highlights and strategic achievements. Then I will turn the call over to Peter, who will discuss our Q4 financial results in more detail. I will then finish with an update on our strategic priorities and outlook.

Starting on Slide 2. We completed a year of very strong financial performance and achieved key milestones of value creation, despite a moderating growth environment and a volatile commodity market. In 2018, we again showed the agility and resilience of our exceptional team, platform and strategy.

Net sales in 2018 grew by almost 10% and EBITDA grew by almost 20% to a record annual $502 million. Earnings per share increased by nearly 50%. Value added sales grew by an impressive 10% as we continue to invest in our strategic growth capacity. Our dedicated team accomplished these results while at the same time, executing on our working capital initiatives, generating a record $186 million in free cash flow for the full year 2018. Using that strong cash flow generation, we achieved our leverage target announced at the time of the transformative ProBuild acquisition in 2015.

Turning to Slide 3. I would like to spend a few minutes highlighting a few of our strategic achievements in 2018. First, we continue to realize the growth and margin expansion benefits of our strategic investments in value-added products capacity by helping our customers solve challenges like increasing cost, lack of labor and waste management. These investments are driving higher margin sales as we continue to grow our industry leading manufacturing network through new plants, automation, new machinery and system upgrades. Since 2016, we have opened eight state of the art truss and millwork manufacturing facilities. As these facilities mature, sales will continue to grow, enabling us to capture share of the expanding offsite fabrication market as homebuilders look for solutions to overcome their labor and cost challenges.

We also continued to make progress on our operational excellence initiatives. These best practices are being implemented throughout the organization to make Builders FirstSource more agile and more responsive. Initiatives under way include enhanced business analytics, pricing management tools or MyBFSBuilder customer portal and digital safety, among others. I will specifically highlight our delivery optimization success a little later in the call, which is already posting tangible benefits, furthering the competitive advantage of our efficient distribution network.

We once again delivered on our commitment to generate strong free cash flow to fund our long-term investments while restoring balance sheet financial flexibility. We funded a $101 million in capital investments, including further expansion of our industry-leading value-added production capacity, refreshing our fleet of rolling stock and upgrading our asset base. At the same time, we reduced our leverage to 3.1 times as of December 31, 2018, a reduction of 1.1 times compared to the prior year end.

Lastly, hiring, training and retaining the best people continues to be a top priority. We invested in the addition of 160 new sales team members in 2018. We also introduced training tools and processes to systematically drive and enable the productivity of our high-caliber sales culture throughout the organization. We are only as strong as our 15,000 talented team members and we remain committed to growing and developing future leaders throughout the organization.

I will now turn the call over to Peter, who will review the fourth quarter financial results in more detail.

Peter Jackson -- Director and Chief Financial Officer

Thanks, Chad. Good morning, everyone.

As a reminder, we have included adjusted figures to normalize for onetime integration and other costs. Please also note that we had one more day of sales in the fourth quarter of 2018 than the prior year. So, I will speak to our results on a sales per day basis.

We reported net sales of $1.8 billion, a 0.5% increase compared to the fourth quarter of 2017, including commodity and deflation of 2.8% and an estimated 3.3% from sales unit volume growth. Our value-add products increased 6.8% led by a particularly notable 9.1% growth in manufactured products.

Gross margin was $492.8 million in the fourth quarter of 2018, increasing by $61.6 million or 14.3% over the prior year. We recorded our highest quarterly gross margin percentage ever at 27.1%, up approximately 290 basis points from the fourth quarter of 2017 and a sequential improvement of 240 basis points compared to the third quarter of 2018.

Commodity prices declined sharply again in the fourth quarter of 2018, continuing the fall that began in June. Framing lumber and sheet good prices declined 39% and 32% respectively compared to the beginning of the third quarter. As a result, our gross margin percentage improved as costs declined relative to our customer pricing agreements. Our team again demonstrated its ability to manage through commodity price volatility and at the same time, maintain a consistent focus on delivering high quality, value-add solutions to our customers.

As we have discussed on prior calls, commodity inflation causes short-term gross margin percentage compression when prices rapidly rise and margin percentage expansion when prices rapidly decline relative to the short-term pricing commitments we provide our customers.

Our SG&A as a percentage of sales increased by 160 basis points on a year-over-year basis. This increase was primarily due to increased commissions and incentives related to our particularly strong and highly profitable growth in the fourth quarter. We pay higher incentives for higher margin sales and accordingly, our outsized gross margins led to higher commissions expenditures in the quarter.

Adjusted interest expense for the quarter was $26.6 million compared to $33.2 million in the prior year, a decline of $6.6 million. The reduction was largely the result of refinancing transactions the Company executed in 2017 as part of the disciplined capital management plan as well as our ongoing debt reduction, slightly offset by a rising interest rate environment.

Adjusted net income for the quarter was $53.1 million or $0.46 per diluted share compared to $46.6 million or $0.40 per diluted share in the fourth quarter of 2017. The year-over-year increase of $6.5 million or 14% was primarily driven by improved operating results combined with lower interest expense.

Fourth quarter EBITDA grew by $28.1 million or 29% to $125 million. The year-over-year improvement was largely driven by our strong sales growth, particularly in the value-added product categories and expanded gross margin from commodity price deflation. As mentioned, the outsized benefit to gross margin from the rapid deflation will diminish over time as commodity prices stabilize and gross margin percentages return to a more normalized level.

Turning to Slide 6. Our ongoing strategy to invest in manufacturing capacity once again delivered results in the fourth quarter. We grew the value-added products by more than doubled the market rate. Our unrivaled platform provides us significant ongoing opportunities to increase both our overall market share and the penetration of higher margin products. In addition, we are committed to continuing the expansion of our current network of 58 manufacturing facilities strategically located across the country.

Given the ongoing challenges faced by our customers, the demand for our labor saving products continues to grow and provides us with expanding opportunities for profitable growth. Our 2019 plans to expand our manufacturing and value-added capacity includes new truss and millwork plants, new truss lines in existing plants, new door machines, new machinery and new systems impacting dozens of markets and locations. In total, we expect to invest nearly one-fourth of our total 2019 capital expenditures in our value-add growth initiatives.

Turning to Page 7. Our fourth quarter sales unit volume per day grew an estimated 4.5% in the single-family new construction end market, outgrowing single family starts growth. Our sales volume to R&R and other end markets grew by 1.1%, somewhat muted by the slowdown in the Midwest where much of the economy is driven by the ag industry, which is being impacted by the trade dispute with China. Multi-family declined about 1.8% as expected.

Turning to Page 8. Total liquidity as of December 31st, 2018, was an ample $595.5 million, consisting of net borrowing availability under our revolving credit facility and cash on hand. Capitalizing on market opportunities and our financial flexibility, we executed a series of open market purchases of our 2024 notes totaling $53.6 million in the fourth quarter of 2018. In February of 2019, we repurchased an additional $20.4 million in aggregate principal amount of the same 2024 notes.

Our net debt to EBITDA ratio as of December 31st, 2018, was approximately half of what it was at the end of 2015, only three years ago, after our strategic acquisition of ProBuild. This is an important milestone for us and we are proud of the exceptional work our team has done to integrate a transformative acquisition, execute to deliver the synergy targets and ultimately deliver on the promise to delever (inaudible).

Moving to Slide 9. Our cash generation was driven -- was again driven by strong EBITDA growth and our team's focus on working capital conversion execution in the fourth quarter. The $186 million of free cash flow generated for the full year represents an all-time record for our Company after funding for $101 million in capital investments. Our current assets are covering an increasingly larger portion of funded debt, reflecting our steadily improving financial stability. As we look forward to 2019, we have a high level of confidence in our team's ability to execute on the initiatives within our control.

Let me provide some color on what we see for our first quarter of 2019. We will have one less selling day in the first quarter of 2019 versus the prior year, so our guidance will be provided on a sales per day basis. We expect commodity price inflation to negatively impact our sales in the range of 6% to 8% in the first quarter. As a result, despite expected increases in unit volumes, we expect our first quarter sales per day to be down by a low single-digit percentage as compared to the first quarter of 2018.

We expect gross margin percentages to be down sequentially from the fourth quarter of 2018 as a portion of the benefits derived from the rapidly declining commodity costs begins to recede. However, as compared to the gross margin percentage in the first quarter of 2018, we expect an improvement in the range of 180 basis points to 200 basis points. As a result, we expect first quarter EBITDA to grow at a mid to high single-digit percentage as compared to the first quarter of 2018.

As we have begun 2019, the macroeconomic environment and fundamental demand factors, all remain supportive of growth in single-family starts and the housing market generally. However, recognizing the uncertainty in the new housing market and the highly volatile commodity prices, we will at this point refrain from providing detailed full year guidance. We remain confident in the industry and in our self-driven performance. We expect our operational excellence initiatives to contribute between $14 million and $16 million in our 2019 EBITDA.

We will continue to invest in our business through capital expenditures at approximately 1.5% of sales. Regarding cash taxes, we expect to fully utilize our NOL tax asset and become a federal cash tax payer, again in the second half of the year. We expect an effective tax rate of approximately 25% for the full year. Cash interest and interest expense are both expected to be in the range of $95 million to $100 million in 2019.

As we continue our systems integration work to support our operational initiatives, we expect onetime related costs about $15 million to $20 million for the year. As a result, we expect to generate $180 million to $210 million in free cash flow for the full year of 2019.

I will now turn the call back over to Chad to provide an update regarding our strategic priorities and outlook.

Chad Crow -- Director and Chief Executive Officer

Thank you, Peter. Moving to Slide 11. Although the housing market and starts growth had moderated over the last few quarters, we remain confident in the fundamental underpinning of homebuilder demand and expect that single-family housing starts will continue to move toward the 1.1 million historical average over the next several years. As we mentioned, we continue to develop our sales force and invest further in our manufacturing and value-added facility expansion and initiatives. These growth platforms provide us significant ongoing opportunities to increase our market share and increase the penetration of our higher margin products.

In addition to capturing market growth, the growth in our value-added product sales and our operational excellence initiatives under way, are expected to generate an additional $100 million of profitability in the coming years. Our plan remains intact, to generate EBITDA approximately 50% higher than our 2018 full year figure of $502 million or roughly $750 million as we reach historic norms. We have revised our cash flow targets to better reflect the cash culture we are building. Our expectation is that overtime, we will achieve greater than 85% conversion of our adjusted net income to free cash flow. The cash generated will be used to fund strategic growth investments and to further improve our financial flexibility.

Turning to Slide 12. We detail our specific growth initiatives expected relative to the 2018 performance. Our core business strengths, including our national footprint, unmatched scale and manufacturing capability and exceptional sales force provides us with a platform well positioned to capitalize on the continuing opportunities we see for core growth in the residential housing market. We expect to generate an incremental $130 million to $160 million in EBITDA compared to 2018 as housing starts normalize.

In addition to this core growth, we will continue to expand our national manufacturing footprint and capabilities to grow our higher margin value-added products faster than the overall market. Our plans currently call for investing in approximately 20 new facilities by expanding our nationwide footprint to serve a number of locations where we see great opportunities to serve market needs with our customers.

Our plan includes a set of operational excellent -- efficiency initiatives under way including investments, such as distribution and logistics software, which I will discuss in more detail on the next slide, as well as pricing and margin management tools, back office process efficiencies and information system enhancements that are expected to contribute between $65 million and $75 million in incremental annual EBITDA. These projects, when rolled out across our 400 locations, are designed to deliver significant cost benefits and margin expansion opportunities. They will further differentiate our service levels, strengthen our connectivity with our customers and provide economic and strategic value that is unrivaled by our smaller competitors. These initiatives are well defined and well within our control. We remain confident that when scaled, they will generate the returns we have targeted.

Moving to Slide 13. Our dispatch and delivery optimization initiatives have now been rolled out to approximately 140 locations. The goal is to systematically drive best-in-class operational efficiency and customer service. Logistics optimization includes the use of GPS technology to allow for predictive maintenance, driver performance monitoring, route optimization, centralized dispatch and more precise management of vehicle disposition and procurement. We've already seen an improvement in driver productivity, fuel cost and safety.

Sales and operational alignment centers around what we call the electronic delivery board. The enhanced reporting has reduced paperwork and allowed our sales team to easily understand the status of all orders, improving accuracy and efficiency. For example, we have seen a reduction in delivery expense and improvement in sales per FTE where fully adopted. The customer collaboration tools provide the delivery status and job site photos to be automatically uploaded to our online portal, MyBSSBuilder, so the sales, dispatch and the customers can collaborate online. This has already shown to improve construction times through reduced hotshots and product returns and has also improved customer satisfaction. By the end of 2019, we expect to roll the system out to over 250 locations that make up more than 75% of our sales.

In 2018, we delivered profitability and on a long-standing strategic priority to restore financial flexibility, marking the completion of our successful integration of ProBuild. At the same time, we continue to invest in building a more durable value-added solutions platform that has demonstrated growth despite a moderating end market environment. The ongoing rollout of our operational excellence initiatives also continued creating and even more agile and responsive Builders FirstSource. Despite the commodity price volatility, we demonstrated the strength and value of our differentiated platform across our national footprint to produce solid growth.

While the economy and key fundamental demand factors remain supportive of housing growth going forward, visibility into 2019 at present is challenging. The timing and extent of the growth in single-family housing starts, in our opinion, will depend on the continued low unemployment, stable interest rates and home builders adjusting to be evolving profile and needs of the home buyers. However, regardless of the exact trajectory of the market, our experienced leadership team and 15,000 dedicated team members remain committed to successfully navigate the changing market conditions. We are better positioned than ever (inaudible) long-term value for our customers and shareholders and I look forward to building our success together.

I'll now turn the call over to the operator for Q&A. Operator, we can now open the call up for Q&A.

Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) And going first to Matt Bouley of Barclays.

Matthew Adrien Bouley -- Barclays Bank PLC, -- Analyst

Good morning. Thank you for taking my questions. Congrats on the quarter and on reaching your leverage targets as well.

Chad Crow -- Director and Chief Executive Officer

Thank you.

Matthew Adrien Bouley -- Barclays Bank PLC, -- Analyst

So, I guess on that point, with leverage down near 3 times, you are authorized to repurchase of course, what can you say about the M&A pipeline in this environment and relative to share repurchases, should M&A be a larger priority this year or do you anticipate kind of further deleveraging as you get toward the lower end of your leverage range there before M&A becomes a bigger tool? Thank you.

Chad Crow -- Director and Chief Executive Officer

Yeah, I think it'll be a little of both. We want to continue to delever, as I've mentioned in the opening remarks, we certainly want to expand our value-added platform and so if some opportunities came along there to do so, to buy versus greenfield, we would certainly look at it. At the present time, I don't anticipate any significant M&A, but certainly would consider some smaller M&A options from a value-add standpoint as opposed to greenfielding. Greenfielding is just getting harder and harder these days with all the restrictions and permitting requirements and it's just taking longer and longer to get buildings out of the ground. So, I would certainly be open to some smaller M&A activity and at the same time, continue to delever a bit.

Matthew Adrien Bouley -- Barclays Bank PLC, -- Analyst

Okay, I appreciate that. And then secondly, just around the guidance. I think the first quarter EBITDA guide given the gross margin performance, it would suggest there's still some offset, I guess, on the SG&A side. Is that just further commissions and incentives as in Q4 or is this kind of further heavy lifting around some of your investments, really just how should we think about SG&A, I guess, beyond the first quarter and when some of these investments may kind of reach scale? Thank you.

Peter Jackson -- Director and Chief Financial Officer

Yeah. So, the discussion around SG&A, obviously you saw the jump in the percentage, there is a couple of factors. Obviously as we deflate, there will be some natural inflation, just like we saw the benefit in the earlier months in 2018. But we did see commissions go up and hopefully that was a clear explanation and that we are -- our commission plans are built to reward our salespeople people for selling at higher margins and so that reward is showing both in the fourth quarter and of course a bit in the first quarter as well.

The other major factors I would describe, comp and benes is certainly an area where we've seen pressure over the last year, unemployment is down and we certainly had to work to take care of our employees and make sure that we have good retention. And we have seen some headwinds in the areas of insurance, both medical and casualty due to ever-increasing, it seems, medical costs in this country as well as some of the hurricanes and the weather that we've seen.

So, some areas there where we have -- and we'll likely continue to see some challenges with inflation. But the team is doing a good job of managing expenses and staying disciplined, particularly in the controllable areas. And our benefits associated with the improvement of the operational excellence are certainly going to be felt throughout the year and we anticipate increasing over time. It's important to remember seasonality, though, right? So, Q1 and Q4 certainly are our lowest volume periods and that's when we'll show the highest percentage of SG&A in any given year.

Matthew Adrien Bouley -- Barclays Bank PLC, -- Analyst

All right. I appreciate all the detail. Thank you.

Operator

We'll go next to Nishu Sood at Deutsche Bank.

Nishu Sood -- Deutsche Bank -- Analyst

Thank you. So, the sales per day guidance implies, for 1Q '19, implies that you're expecting once you factor out the lumber price, right, in the commodity inflation drag about mid single-digit gains year-over-year in sales per day. That's obviously a pretty strong performance in light of some of the volatility that we've seen in the housing market. Some builders are reporting double-digit order declines, et cetera. So has the book of business, has it seen any effect from that for you folks? And if so, when would you expect to see it? Your macro commentary found it's still positive, but just wanted to see if you could reconcile for us the pretty robust expectation for 1Q '19 versus some of the other data points we are hearing from some of the public builders.

Peter Jackson -- Director and Chief Financial Officer

Yes. So, I guess I'll start and of course Chad can jump in. The components therein, I would say our expectation is more in the low single-digits increase, particularly for single-family. There is growth in the business. We've got, of course, a little bit of share that we think we've got line of sight too, perhaps a little bit of rounding in some of the numbers that you're doing the math on, but we think it's in the low single-digit range.

Reason for our confidence in that is really the performance we had in the fourth quarter, for starters, as well as the ongoing contact we have with our customers, the sentiment out there despite the headlines and we read them too, but the sentiment among the people on the ground is that a lot of what has concerned folks and has slowed people down has begun to abate. Interest rates have dropped a bit, the cost of lumber clearly has dropped a bit and we think those encourage homebuyers to get back in the game as things settle down a bit.

The pause that we expected, we think is just that pause and things will get back to a more normalized level, while perhaps slower growth than we've seen at certain points in the past couple of years, still growth. So lot of optimism out there and despite some lumpiness, whether it be weather or a pause, we still have a lot of confidence in the underlying demand.

Nishu Sood -- Deutsche Bank -- Analyst

Got it, got it. Okay. And second question on the increased sales commissions, you had a fantastic record gross margin, as you mentioned, 27.1%. Let's suppose that the 25% is the normalized and actually I'd love your thoughts on that whether that's still the case, so, 210 basis points above the quote, unquote normalized. How much incremental sales commission did that drive in basis points?

Peter Jackson -- Director and Chief Financial Officer

So I guess the first comment I'll make is regarding normal. I still think that 25% is a reasonable proxy for normal in terms of gross margin. We talked about that in the past. I think that's still true. When we talk about comp and benefits, I don't know that I have a breakdown of the commissions as a percentage, I can tell you it's about half -- a little less than half of the SG&A variance for the fourth quarter. So, it is substantial amount.

Nishu Sood -- Deutsche Bank -- Analyst

Got it, got it. And is the -- as we think about this commission, I mean it -- was it larger because of the extreme volatility? So is the incremental sales commission against where prices were -- I mean I use the benchmark of 25% normalized gross margin, but does the commission work that way or is it against improvement in gross margins, so that the extreme volatility might have had a greater effect and pushed those sales commissions on stronger margins up more than they might have been in a more normal volatility environment?

Peter Jackson -- Director and Chief Financial Officer

Yeah, I think it's fair to say your assumption is right. If you think about of them from a purely simplistic level, if we are making 20 points normally on some lumber and underlying cost falls and we talked about it being in 30% range, it's a substantial increase in the profitability of that particular sale. Just like when we see inflation in the profitability goes out. We both reward and analyze our salespeople for achieving higher profitability and lower profitability, respectively. So that net sort of compounding effect of improved gross margins generate a higher payout, because the dollars have increased and there is a premium associated with higher than normal and in this case, much higher than normal margin recovery. Did that make more sense? Is that clear?

Nishu Sood -- Deutsche Bank -- Analyst

That's great. Thanks for your thoughts.

Operator

And our next question is from Trey Morrish at Evercore ISI.

Trey Morrish -- Evercore ISI -- Analyst

Thanks. Thanks very much guys and really good quarter. I want to talk a second about the margin trajectory outside of lumber. So, we understand that lumber, you have quite a bit of volatility just given the massive pull down. But could you give us some thoughts, some insights on what your gross margins outside of the lumber category looks like, were they also up as well or were they kind of more flattish?

Peter Jackson -- Director and Chief Financial Officer

They were pretty flat. The only exception to that is where we've done work around on our pricing optimization tools. We think that by managing and being a bit more disciplined with some of the tools that we have, we were able to drive, for the year, probably about $4 million worth of benefit in those initiatives, and a lot of that was in the fourth quarter.

Chad Crow -- Director and Chief Executive Officer

And I'll just add, we did see some improvement in the manufacturing products category. As you know, we continue to invest in our truss plans and automate where we need to and we're seeing some efficiencies there. So, Peter is right, obviously, lumber was up, especially the back half of the year. The other product categories were relatively flat, but we also saw a decent little bump in manufactured products.

Trey Morrish -- Evercore ISI -- Analyst

Okay, thanks for that. And then, turning back to the volume outlook that you're looking for 1Q, you said, it is kind of low single digit range. But at this point, we're two-thirds of the way time wise through the quarter, maybe not quite business and sales-wise, would it be fair to extrapolate from your comments that you're probably tracking flat to probably up so far year-to-date?

Peter Jackson -- Director and Chief Financial Officer

I don't plan to change my guidance and I think we'll make the guidance for the quarter.

Trey Morrish -- Evercore ISI -- Analyst

Okay. All right.

Peter Jackson -- Director and Chief Financial Officer

It's implied, right? I mean, yeah. Thank you.

Trey Morrish -- Evercore ISI -- Analyst

Thanks.

Operator

We'll go next to Mike Dahl at RBC Capital Markets.

Michael Eisen -- RBC Capital Markets -- Analyst

Good morning. Mike Eisen on the line for RBC. Just wanted to start off on the value-add products. You guys continue to invest and drive growth here, but we did see it step down a little in the fourth quarter. Can you talk about what drove some of that and whether you think that's broader market slowdown or if we should expect a more consistent mid to high single-digit rates or if you guys can reaccelerate that and continue to grow outside in that -- in those segments?

Peter Jackson -- Director and Chief Financial Officer

That's a fair question. There is certainly a deceleration in the growth when you look at the numbers on a consolidated basis, right? I'd say, some markets are still very healthy, some markets have weekend on balance, it's a bit slower. There is still a lot of demand for the value-added product, right. There's, despite, again all of the terrible headlines, the demand hasn't really gone anywhere. It's still there and so the availability of labor, the job sites being not having sufficient people on the ground are all still challenges for our customers. We still are seeing significant year-over-year increase in people investigating expanding their use of pre-fabricated product, whether it be trusses or panels or whether the bed framing system, we are seeing that and enjoying the benefits of that. Gauging it on a quarter-by-quarter basis, in terms of growth, trying to align it with the overall market growth, it's a challenging thing to do from a forecast perspective, probably fair that it would step back a bit from its headier days last year when the overall market was growing at a higher rate, but we still anticipate healthy growth through '19.

Chad Crow -- Director and Chief Executive Officer

Some of it could be regional too, a lot of the heavier use regions of the country, the Pacific Northwest and the Northeast and those tend to be impacted a little more, bad weather, than say Texas isn't impacted as much, but also it isn't as much of a truss market.

Michael Eisen -- RBC Capital Markets -- Analyst

Got it. That's really helpful information. And then transitioning to your delivery optimization program, you guys laid out some early successes that you've had and desire to roll this out to 75% of the branches before the end of the year. Can you help us think from a P&L perspective some of the early results you've seen in the branches where it is, whether it be better SG&A, better throughput, something that we can help quantify the magnitude of the potential here?

Peter Jackson -- Director and Chief Financial Officer

Yes, sure. So, we are looking at that number for 2018, still early days in a lot of locations, but really positive feedback from the users and those that have really adopted it and started to squeeze some juice on it and have seen some really nice benefits on the bottom line. As you can imagine, it impacts both gross margin in the variable cost as well as SG&A in some of the overhead costs, we think that we saw -- from our analysis, we've seen about $2 million worth of benefit in 2018, from the delivery optimization tools, which is primarily the software that we manage, as well as some other ancillary tools that we're using. We think that of course is going to grow as we get those locations implemented and then ramped up, sort of a two-phase approach for each location.

Chad Crow -- Director and Chief Executive Officer

And I'll just add, in total, we see that as a Company over the next several years, somewhere around a $20 million or $25 million opportunity, which translated it means we need to be about 5% more efficient from a delivery standpoint and from a yard personnel standpoint or said another way, somewhere around 30 basis points as a percentage of sales. So it's a real opportunity and I feel very good about being able to achieve those numbers in the coming years.

Michael Eisen -- RBC Capital Markets -- Analyst

Got it, thanks. Good luck.

Peter Jackson -- Director and Chief Financial Officer

Thank you.

Operator

And we'll go next to Jay McCanless at Wedbush.

Jay McCanless -- Wedbush -- Analyst

Thank you. Good morning, everyone.

Peter Jackson -- Director and Chief Financial Officer

Good morning.

Jay McCanless -- Wedbush -- Analyst

So, my first question, if lumber prices stay where they are now, theoretically, should we expect some deleveraging on the overhead margin, just assuming we stay like in this $350 million to $400 million for the full year?

Peter Jackson -- Director and Chief Financial Officer

Of course. Yeah, I mean it's -- we think it's going to work on an inverse way as last year. The growth in commodities benefited us on SG&A as a percent of sales when it was inflating and as it deflates, it will go the opposite direction. I mean, we didn't add people for example, when it inflated so we won't take people out when it deflates but underlying that I think we're very pleased with the fourth quarter results are -- there were some skepticism, if you recall, Jay, in the market about whether or not we'd be able to protect our margins in case of deflation and whether or not we would see the outsized benefit in our gross margin percentages that we claimed and I think our results certainly prove that we did what we said we would do.

And so we'll manage through this year. You know there'll be some continued volatility, commodities always managed to throw us a curveball or two. But I think we're very well positioned, we've proven our discipline and our ability to manage in both up and down markets and we're going to do that this year and focus on the operational stuff that we know we can control and we'll focus on making money on commodities and keeping the business in line and being disciplined.

Chad Crow -- Director and Chief Executive Officer

Yeah, and I'll just add, I don't think, I'm going out on a limb to say it's very likely commodity prices will not be as volatile this year as they were last year. I do think, as we get into the spring and summer building season, we will see some inflation, but even that being said it's likely going to be a bit of a headwind this year. But all in all, as everyone knows on this call, we operate in a cyclical business and this is just part of it. And in a cyclical business, you have good years, you have bad years. 2018 was a good year and despite maybe some additional headwinds in '19, 2019 is going to be a good year. So, as Peter said, we will deal with what comes our way, but we feel really good about things as we sit here today.

Jay McCanless -- Wedbush -- Analyst

The second question I have, the excitingly bad weather we've had in a lot of different locations this year, I'm assuming that the guidance you have given on sales per day includes whatever weather benefit you've seen so far? Could you talk about that a little bit, what impact that's had on R&R and then also the other one I wanted to sneak in, could you repeat, and I missed this, I apologize, but just how much of the 2024 notes you guys bought in both in 4Q and this quarter?

Peter Jackson -- Director and Chief Financial Officer

Yeah, so to answer the second question first, it's about 75 Total, 50 in Q4 -- 50-ish in Q4 and 25-ish Q1. Yeah, I mean I'll make a couple of comments on the weather. I mean, first of all, definitely not a benefit, I'm assuming you're being facetious on that one, lot of disruptive weather, a little bit in the fourth quarter, more in the first. We -- candidly, we don't like getting into the weather reports, but having heard other folks talk about it, that absolutely is real polar vortexes, blizzards, unusual snow in the Pacific Northwest, unusual rain in the Pacific Southwest. So it was certainly an interesting time. Yes, we've included the bulk of what we've seen so far, but I can't say tomorrow's weather pattern is focused in, how to respond to that, but we think it's pretty well baked in. Certainly lot of West Coast disruption, Upper Midwest disruption, it's been problematic, but it is what it is.

Jay McCanless -- Wedbush -- Analyst

Sounds good. Thanks guys.

Peter Jackson -- Director and Chief Financial Officer

Thanks, Jay.

Operator

And we'll go next to Matt McCall at Seaport Global Securities. Sir?

Matt McCall -- Seaport Global Securities. -- Analyst

Thank you. Good morning, everybody.

Chad Crow -- Director and Chief Executive Officer

Hi, Matt.

Peter Jackson -- Director and Chief Financial Officer

Good morning, Matt.

Matt McCall -- Seaport Global Securities. -- Analyst

So the -- you talked about the bogey, 85% average annual free cash flow as a percent of adjusted net income. Can you talk about that -- how that looks to 2019, I'm specifically thinking about the impact of lumber on working capital, I mean how do we think about '19 relative to that 85% ?

Peter Jackson -- Director and Chief Financial Officer

Yeah. So, it's good question. Part of the reason for not giving guidance is because depending on where the commodities goes -- there goes my both EBITDa and there goes my working capital, likely in different directions, same true with single-family starts. The rationale for the changes, people got hung up candidly on that long-range plan presentation with regard to the cumulative cash flow and kept trying to lock it back to, so what year, what year-end, our point in that is really to emphasize a normal housing market has a significant tailwind from where we are today on our results. And over time, our performance, our proven performance really seems back very well to that sort of 85%, some years more, some years it will be less, but right in that 85% range historically and going forward for cash generation that we can utilize, right, to grow the business, to pay down debt, to continue to strengthen our balance sheet.

So, we felt that was a more appropriate way of talking about it rather than a single dollar amount over a cumulative number of years. So that was the rationale for the change. As we get into our full year guide, we can add that to the list and need to provide to everybody that percentage for the year.

Matt McCall -- Seaport Global Securities. -- Analyst

Okay, that's fair. I understand the uncertainty around what lumber does. So I think in the past you've talked about 9% to 10% working capital, 9% to 10% incremental sales. If lumber stays where we are today, how should we think about the full year, is that still a good rule of thumb?

Peter Jackson -- Director and Chief Financial Officer

I would say, generally it is. But you have to account for the lumber volatility as an impact as well, right?

Matt McCall -- Seaport Global Securities. -- Analyst

Okay.

Peter Jackson -- Director and Chief Financial Officer

And if you can tell me what my volume is and what commodities will do, I can tell you what my working capital impact is going to be.

Matt McCall -- Seaport Global Securities. -- Analyst

Okay. I'll work on that.

Peter Jackson -- Director and Chief Financial Officer

Thank you.

Matt McCall -- Seaport Global Securities. -- Analyst

So, Chad, you said you're still going to focus on debt reduction. You've kind of have gotten, I think to the midpoint of the targeted range, if I remember correctly. What's -- do you have a new target established or you just continue to work it down the absence of an opportunity from here? Where -- how do we think about your net debt to EBITDA bogey?

Peter Jackson -- Director and Chief Financial Officer

Yeah, it depends, right, it depends on how we're feeling about the cycle and where we are. It depends about -- it depends on what opportunities may present themselves. I'm not going to turn a blind eye to opportunities, if they come along. If there's something came along and it required us to part (ph) back up to 3.5 times or 3.8 times, but we had a clear runway of bringing it back down in short order, I'm not going to say no to or at least not going to -- so I'm not going to look at something like that. We -- back in 2015, we had no idea ProBuild would come along and I'm damn glad we did it. So, it really just depends on the opportunities that are out there, but I would say, barring any significant opportunity that we want to look at, yeah, I'd say, driving it down somewhere closer to 2.5 times on a longer term basis is probably what we'd be looking at.

Matt McCall -- Seaport Global Securities. -- Analyst

Okay, perfect. And then last one. I think you broke out the CapEx is going to be aimed at kind of new facilities. Some of the truss (inaudible) millwork plants, truss lines and door machines, I guess the question is, what's the incremental add look like '19 versus what you just experienced in '18? How much are you going to add at either each one of those or the total?

Peter Jackson -- Director and Chief Financial Officer

We called out about a quarter of our CapEx, about a quarter of the 1.5%, we think will be focused on those categories that I think you were outlining there.

Matt McCall -- Seaport Global Securities. -- Analyst

And how did that -- what was the total in '18 in those terms? About the same?

Peter Jackson -- Director and Chief Financial Officer

That's a good question. Probably about the same, maybe a little less, or right in there.

Matt McCall -- Seaport Global Securities. -- Analyst

Okay. All right, thank you all.

Operator

Moving next to Steven Ramsey at Thompson Research Group. Sir?

Steven Ramsey -- Thompson Research Group -- Analyst

Good morning. I would assume just thinking about your locations sort of on a portfolio basis and you continually assess KPIs and the outlook of each. From that perspective, did you close any locations last year or open any? And do you expect anything on that front this year? And kind of how did you look at the penetration of value-added products, penetration and locations and the revenue capacity in generation of each? I guess, just kind of thinking locations basis, are you where you want to be?

Peter Jackson -- Director and Chief Financial Officer

So I guess I can open it and then I'm sure Chad will probably want to jump in. But the decisions about opening and closing facilities in a given year, yeah, we know we opened, I think two this year and closed two this year. So, we're continuing to modify. We closed an operation in East Hartford, Connecticut I think and one in Oklahoma city, but kept others in Oklahoma city. So, we're constantly sort of looking for opportunities to take out businesses, where the return isn't where we need it to be and add locations where we think either a greenfield or a product-specific location might help us out with regard to capacity, on the value ad side each line, each type of equipment has certain capacity availability and that's where we flex, right? If we've got a location that starts to run up against capacity constraints but has manual equipment, we can move that manual equipment out to another location and bring in automated equipment and add a bunch of capacity into the locale. Little trickier on the lumber side, your footprint matters or things you can do to improve efficiency, but there is some real space constraints that will limit the amount of dollars you can put through a facility and that falls into the decision making that we go through regularly about where do we need to add either square footage or acreage in order to run the business.

It is an ongoing decision and then it is one of the things that we've really started to analyze a couple of different ways, right. We, of course, manage it on an EBITDA basis, on an EBT basis, but also we're looking at it on an ROIC basis in order to make sure we're making wise decisions from a more strategic perspective.

Steven Ramsey -- Thompson Research Group -- Analyst

Great. And then thinking about R&R, you know slower in the Midwest, but broadly outside of the Midwest, is R&R activity performing more strongly when you look at it that way? And is your outlook from today, thinking about 2019, is it more predictably good? Are you able to kind of quantify range on growth in that end market than you are with new construction?

Peter Jackson -- Director and Chief Financial Officer

I would say, to answer your second question first, no, we are not quantifying growth in that space largely because of our geographic exposure, being in the Midwest -- in R&R and other, in the Midwest, in Southern California and up into Alaska. Those are sort of concentrated areas. At least in the Midwest perspective, a lot of uncertainty candidly, with regard to the US-China trade and the impact on the ag, soybeans and pork in particular and the resulting sort of hesitation by certain markets to really get aggressive in some of their sales and some of their investments.

Southern California is, I'm sure everybody knows, very volatile market historically, that's proven true over the last couple of years as well. So I'm a little reluctant to call ball on that market as well. And then unfortunately, Alaska, despite the beginning of a recovery in oil prices in the fourth quarter, sort of pulled back a bit. So, there is a bit more wait and see up there as well. So I would say those are all reasons for uncertainty, not reasons for optimism at this point, but we're going to wait and see.

Chad Crow -- Director and Chief Executive Officer

Yeah, I don't -- we'd say the sky is falling, but the Upper Midwest will be a challenge this year, I think Alaska will be a little better and Southern California is a bit of a question mark right now. So I would echo what Peter said, don't see it going gangbusters, it could be a little sluggish this year.

Steven Ramsey -- Thompson Research Group -- Analyst

Great, thank you.

Peter Jackson -- Director and Chief Financial Officer

Thank you.

Operator

And we'll go next to Kurt Yinger at DA Davidson.

Kurt Yinger -- DA Davidson -- Analyst

Yeah, good morning, everyone and thanks for taking my questions. I just wanted to start off on going back to gross margin, if I did my math right, you're looking for 26% or maybe a little bit better in the first quarter and you mentioned 25% is still kind of a reasonable normal figure. How quickly could we move back toward that as the year progresses? Is it something where you lose a lot -- about 100 basis points quarter-over-quarter in the first quarter and the same in the second or is it maybe more of a gradual step down?

Peter Jackson -- Director and Chief Financial Officer

Generally, what we've said in the past and I think it's true still now is it takes about a quarter or two to work through inventory on the ground and the pricing arrangements we have with our customers. So, I would say, given their prices started running back up in Q1, Q1, Q2 is where you're going to see the vast majority of the impact.

Chad Crow -- Director and Chief Executive Officer

Yeah, I think it'll pretty much have played out barring some unexpected change by the end of Q2.

Kurt Yinger -- DA Davidson -- Analyst

Okay, very helpful. Thanks. And looking at the $65 million to $75 million sort of improvement from operational initiatives, returning to sort of mid cycle building levels, is there any way to think about that savings between cost of sales and gross margin versus SG&A?

Chad Crow -- Director and Chief Executive Officer

I would say it's probably one-third margin, two-thirds SG&A.

Kurt Yinger -- DA Davidson -- Analyst

Okay. And lastly, what's a good way to think about interest rate -- interest expense for the year?

Peter Jackson -- Director and Chief Financial Officer

Yeah, so our guide is about $95 million to $100 million.

Kurt Yinger -- DA Davidson -- Analyst

Okay, thanks very much.

Chad Crow -- Director and Chief Executive Officer

You bet.

Peter Jackson -- Director and Chief Financial Officer

Thank you.

Operator

That does conclude today's question-and-answer session. And I'd like to turn things back over to Mr. Crow for any additional or concluding remarks. Sir?

Chad Crow -- Director and Chief Executive Officer

Thank you, once again for joining our call today. We look forward to updating you on the progress of our initiatives in the quarters ahead. If you have any follow-up questions, please don't hesitate to reach out Binit or Peter. Thank you.

Operator

And ladies and gentlemen, once again that does conclude today's conference. And again, I'd like to thank everyone for joining us today.

Duration: 56 minutes

Call participants:

Binit Sanghv -- Vice President, Investor Relations

Chad Crow -- Director and Chief Executive Officer

Peter Jackson -- Director and Chief Financial Officer

Matthew Adrien Bouley -- Barclays Bank PLC, -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Michael Eisen -- RBC Capital Markets -- Analyst

Jay McCanless -- Wedbush -- Analyst

Matt McCall -- Seaport Global Securities. -- Analyst

Steven Ramsey -- Thompson Research Group -- Analyst

Kurt Yinger -- DA Davidson -- Analyst

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